In geometry, triangulation is the process of determining the location of a point by forming a triangle to the point from two known points.

The process of determining current real estate pricing can be thought of as a form of triangulation: between the value, the yield and the cash flow assumptions.  The trick is to fix two of these points.

For example, a valuer will take a transaction price and imply a yield using a fixed set of cash flow assumptions for costs, vacancies and growth. The bidders on that transaction will each have had their own, more realistic, assumptions for the future cash flow and for the appropriate yield/discount rate. The reported yield therefore varies depending on the cash flow assumptions used by the valuer to equate to the (fixed) value using triangulation. The valuers cash flow assumptions and yield will therefore differ to those of the successful purchaser and the cash flow assumptions used to triangulate between the value and the yield are not intended to be realistic.

Market yields

In published market yields, which are often based on the opinions of local experts, the yield reported also depends on the cash flow assumptions. These cash flow assumptions in different countries and sectors are usually based on ‘local conventions’ around the treatment of costs, vacancies and growth. To produce a set of consistent yields across markets therefore requires adjustments to the yields as though they had been based on the same set of consistent cash flow assumptions – usually without the benefit of a user manual as it is seemingly felt that the nuances of these assumptions are so widely understood that it is unnecessary to report them.

Projecting market performance

The RES Asset Allocation Model uses a set of consistent yields based on a fixed set of cash flow assumptions.  For example, market pricing in one market may assume a high level of irrecoverable costs and this deduction needs to be made from the yield to estimate the future level of income return, whilst another market may assume no such cost deductions.  The Model then calculates future market capital growth, based on expected changes in market yields and rental values. A more realistic set of cash flow assumptions is then applied to project the net income (and therefore the income return).